NOTEBOOK: Estate expert: Now is the time to consider using federal tax exemption

I recently sat down for a brief visit with Charles “Skip” Fox IV, a nationally recognized estate tax expert from Virginia, for an overview of some of the issues he follows for his high-net-worth clients (roughly $25 million to $500 million in assets).
Fox, who just recently ended his term as president of the American College of Trust and Estate Counsel, is a partner with the McGuireWoods law firm and has spoken on estate law across the country. He was here in Des Moines at the invitation of Mike Zuendel, majority owner and adviser with Legacy Bridge LLC, a multifamily private office in West Des Moines.
Over nearly four decades of practicing estate law, the most consistent pattern Fox has seen is that the laws are constantly changing, he said.
“I’ve seen the [federal estate] exemption go from $125,800 to $10 million,” he said. “I’ve seen the [estate tax] rates go from 55% to 35%, back up to 40%, with variations in between and all sorts of different rules. And that’s going to continue. That’s why people, when they do their planning, need to be flexible in it so when there is a change in the law there are no adverse results.”
For instance, the U.S. Supreme Court is now reviewing a few cases in which estates have challenged states’ efforts to impose estate taxes on the basis that there is insufficient nexus within the state by the deceased or members of the family.
The inflation-indexed estate tax exemption, currently $11.4 million, was nearly doubled by the Tax Cut and Jobs Act of 2017, but that amount sunsets to the previous amount in 2025.
“With the ability to create these larger trusts with the [bigger] exemption, more trusts are going to be subject to income tax,” Fox said. “You usually set up a trust for the benefit of family members. … You want to see what you can do to avoid income taxes, especially when several states are trying to tax the income. … We’ll be waiting to see what sort of decision the Supreme Court issues, which I would assume would be before the term ends in June.”
Iowa’s inheritance tax applies to a relatively small number of people, and is not as onerous as many states’ estate tax landscapes, he said. He described Iowa’s income tax system as “not draconian, unlike some other states’.” According to the Tax Policy Center, there were only an estimated 1,890 taxable estates in 2018.
The ideal situation he recommends for many clients, particularly as they get on in age, is to set up residency in a state with no income tax and no state death tax.
Seventeen states and the District of Columbia have state death taxes. Iowa has an inheritance tax, he said, “but it only applies to a few people, so you don’t have to worry about it too much.”
With the larger exemption, “for people who can afford to, they ought to be giving as much of it away to other family members, so that if the exemption [is decreased], they’ve gotten it out of their estate.”
For many families whose wealth is measured by the acre on the family farm, a technique called special use valuation may allow them to pass the farm along to family members who intend to continue operating the farm, providing them a break on taxes, Fox said.
“Also, with so many farms being operated as limited partnerships or LLCs, there are ways to use those to not only minimize liability and keep it in the family, but also get discounts when the [owner] dies,” he said. Of course, that has to be done with every i dotted and t crossed, or the government may challenge the discounts.
“It’s a lot easier to do the planning when the person is alive rather than after the person dies,” Fox noted.
There’s been a lot of growth in high-wealth families in the United States, and the number of so-called family offices that offer customized planning for them is keeping pace, Zuendel said. In 2014, there were about 2,000 private family offices nationwide; that figure is expected to reach 5,000 by 2020. The trend has been toward more multifamily private offices, as those offer greater cost efficiencies for families, he said.
Notably, if you look at the number of families in the $10 million-plus net worth range, Iowa likely has about 700 of those high-wealth families, Zuendel estimates.